As a lender that’s held a firm position in the buy-to-let sector across various market cycles, we really appreciated the head of sales at Birmingham Midshires (BMS), Phil Rickards taking the time out to answer a series of topical questions.
Phil elucidated on the impacts of the Prudential Regulation Authority (PRA) lending restrictions, how highly-geared landlords can address their borrowing issues and handle other risks in what is constantly evolving environment.
He also gave some thoughts ongoing challenges faced by the buy-to-let market, some pointers on a making a successful mortgage application, how Section 24 has impacted BMS’s own underwriting processes as well as opinions on the Greater London and South East rental markets.
And, of course, no contemporary interview is complete without asking a question about Brexit (although we left this till the end in our defence!)
It would be interesting to hear your thoughts on how Birmingham Midshires’ approach to buy-to-let lending has evolved since the initiation of the Prudential Regulation Authority (PRA) stress-testing criteria?
We welcome any regulatory changes which aim to improve standards and offer better service to customers.
There’s no doubt that recent PRA changes have encouraged lenders to improve their product offering. At Birmingham Midshires, we have introduced a portfolio lending proposition and have adopted the PRA standards as required for stress testing including a differential stress rate for five-year fixed rate mortgages. This was welcomed by brokers and demonstrates our commitment to helping brokers do business with us by responding to their feedback.
What would be your advice to landlords that are highly leveraged to the point where they may have difficulty remortgaging to the lower loan to value ratios required by the majority of buy-to-let lenders these days?
The recent increases in affordability requirements have made things more difficult for some landlords, making it more challenging to move between lenders.
Our experience tells us that lenders have responded positively to this challenge by developing new solutions for this group of borrowers. For example, provided no additional borrowing is required, like-for-like remortgages can be assessed under different criteria.
A good mortgage broker is the first point of call, and should be able to source the market for an option that meets the borrower’s individual needs.
The media would have the general public believe that ‘buy to let’ is dead. What are your thoughts when you hear statements like this?
Although overall lending to buy-to-let customers will be down as a result of the amount of change the sector has experienced, I wouldn’t agree with this statement. Given that our own business volumes have held up well and we expect 2018 figures to remain stable, we are a little more optimistic about future market prospects than some of the media would have us believe.
We have also seen fewer landlords purchasing property and more remortgage activity. So overall, volumes have reduced but there is still a shortage of housing – and the private rented sector continues to play an important part in helping to bridge this gap.
Where do you feel the main risks are in the buy-to-let sector at the moment? How can buy-to-let investors / landlords best prepare themselves to mitigate them?
The market has become more segmented and complex as a result of a raft of changes over recent years that have changed the way the market operates, from stamp duty, to tax changes and underwriting standards.
It’s more important than ever for landlords to be talking to mortgage brokers who can help them navigate and better understand this more complicated mortgage landscape, and seek independent tax advice to make sure their portfolios are structured in the right way for their individual circumstances.
Related to the above, how can landlords best prepare to get their buy-to-let mortgage application accepted by Birmingham Midshires?
Applications need to be packaged correctly with accurate information supplied as required. The services of a good mortgage broker will be required to submit the application, and our Business Development Managers (BDMs) are there to help things run smoothly. Getting it right from the word go is the best way for us to get the application through a seamlessly as possible.
We’re extremely proud of our service track record and have a dedicated team of clued up, passionate BDMs that work to help brokers continue to make us top of the class when it comes to how we deal with our customers.
How much of a threat do you see Section 24 of the Finance (No. 2) Act 2015 Act? Are the BMS underwriting processes factoring landlords’ current and future tax liabilities as a result of this legislation?
It’s expected that lenders should be required to act responsibly, and asses the financial viability of their borrowers. In that respect, I wouldn’t necessarily see section 24 of the Finance (No.2) Act 2015 as a threat.
We have embraced the requirements of the recent legislation and our underwriting procedures are set up to be fully compliant.
How would you broadly forecast Birmingham Midshires’ growth in the buy-to-let space over the next five years?
Of course I don’t have a crystal ball and can’t look into the future, but we have been a key supporter of the buy-to-let market for nearly 20 years and for much of this period have been the UK’s biggest lender. We wouldn’t have held this position without continuing to meet brokers’ and customers’ needs. We are constantly looking at how we do things and innovating to come up with ways to help brokers do business. We are always listening to feedback, and we’ll continue to shape our business around our customers’ needs.
We remain committed to supporting this crucial part of the market as we continue to evolve.
It would be great to get your thoughts on the Greater London and South East buy-to-let market. Whilst demand is as high as ever, yields are low compared to much of the rest of the country – especially given the huge level of capital gains in recent years. Combined with the effects of Section 24, the stamp duty surcharge, the PRA criteria etc., does BMS have an appetite to lend to this market? If so, under what circumstances?
This is a topic that continues to receive extensive media coverage due to property prices and the availability of properties in the South East, but also the appetite of borrowers to invest in this area.
There is no doubt that the changes have made it more difficult for borrowers given the increased rental coverage ratio requirements and some borrowers may be unable to move between lenders as a result.
We have also seen resultant regional impacts with higher rental cover ratios and stress rate requirements less impactful the further north you travel. In terms of our own business, we introduced a bespoke solution to the tax changes which has remained popular with brokers so we do continue to lend to all parts of the UK but admittedly some circumstances may rule us out. We continue to review our policy as we deem appropriate.
From a broader perspective, do you have any thoughts on wider macroeconomic factors (Brexit, potential interest rate increases etc.) and how they may affect landlords and buy-to-let investors in the coming years?
Everywhere we look there is speculation over Europe, rates, uncertainty and other challenges. Our latest BM Solutions landlord panel report, based on research from BDRC, revealed that confidence in the UK’s financial markets and capital gains increased by 3% and the private rental sector by 2% year on year.
Although landlords’ confidence in rental yields dipped in the second quarter of 2018, the average rental yield currently being achieved of 6.2% is at its highest since Q4 2014.
In this environment, it’s encouraging to see that confidence is particularly strong when landlords are considering their own lettings business.
It’s also a promising sign for landlords that rental yields are on the increase and are recovering some of the ground they have lost in recent years.
BM Solutions’ full rental income calculator checks the eligibility for buy-to-let loans prior to submitting a mortgage application. To see the results, enter the number of applicants, type, income, product rate, term length, maximum loan to value, property value, loan required and anticipated monthly rental income. Note the disclaimer that the calculations are for illustrative purposes only and do not represent a full mortgage offer.